Delaying the start of your estate planning could come with a significant cost (Image: GETTY)
Families could be forfeiting thousands in ‘preventable’ Inheritance Tax charges, according to financial experts, after fresh research revealed that postponing just one key decision by several years could prove far more costly than many anticipate.
With untouched pensions set to be brought into Inheritance Tax assessments from next year, millions of families who never imagined they’d face inheritance tax could suddenly find themselves hit with the 40% charge.
This follows new data showing that nine in 10 UK postcodes now have more estates triggering IHT bills than they did five years ago.
Fresh research from Octopus Investments has found that the timing of your estate planning could significantly affect how much you’re able to leave behind for your loved ones.
Looking at affluent families who begin the process at 50, it discovered they could pass on £397,000 more to their relatives compared to those who delay planning until they reach 70.
Outside of the financial hit late planning can take, the research also found emotional costs of the delay as nearly seven in 10 financial advisors say they’ve seen tax or family conflict because estate planning was started too late.
Advisors added that many clients delay starting the process because they think they are ‘too young’ or struggle to have conversations about death and their legacy.
Kristy Barr, Head of Retail Investments at Octopus Investments said: “The biggest threat to a family’s legacy isn’t tax – it’s the conversation that gets postponed. Most of the wealth lost to inheritance tax isn’t lost to bad planning.
“It’s lost to no planning, by families who genuinely meant to get round to it or people who simply didn’t realise they had an inheritance tax problem.”
New research has zeroed in on affluent families sitting in the top ten per cent of UK wealth, ahead of next year’s pension reforms, noting that actual outcomes will depend on each household’s individual circumstances.
It found that these high-net-worth families could collectively lose an estimated £12.3billion in ‘preventable Inheritance Tax’ once pensions are brought into Inheritance Tax liabilities next April.
The contentious change will mean unused pension funds are included in the value of your estate for Inheritance Tax purposes. It is designed to close a loophole that allowed pension pots to be used as a vehicle for passing wealth down through generations without being subject to Inheritance Tax, as they are currently exempt.
Even setting aside this shift in tax policy, the research revealed that families who take a passive approach to estate planning could end up passing on £258,000 less on average than those who begin the process early.
Inheritance Tax is charged at a flat rate of 40% on estates valued above the threshold of £325,000. There are, however, certain exemptions that can shield estates above this figure from being taxed — and acting on these strategies sooner rather than later could be worth thousands, according to research commissioned by Octopus Investments.
The report, 50nomics: the evidence behind earlier estate planning, also uncovered a widespread misconception about when estate planning should actually begin.
UK adults believed on average that it ought to start at around 44 years of age, while financial advisors report that clients typically don’t get started until around 61 years old. A staggering 86% of those in their late 40s admitted they hadn’t undertaken any estate planning whatsoever, a figure that only fell to 70% amongst those in their 50s.
Kristy added: “Our research indicated the difference between affluent families starting their planning at 50 and starting at 70 is, on average, nearly £400,000. Multiplied across the country, that is billions of pounds in legacies left on the table.
“For most families, the decision to wait feels like the safer one. 50nomics puts a price on that quiet decision – and a value, for those who act, on starting the conversation sooner.”